Canadian cannabis producers are accelerating entry into the US

Canadian cannabis companies have picked up the pace to position themselves in the fast-growing markets south of the border - with a number of the deals basically a bet that the United States will legalize marijuana soon.

Recent deals run into the hundreds of millions of dollars and include:

• Options to acquire interests in medium-sized US operators in several states.
• Acquiring the debt of a marijuana company.
• Purchases from CBD companies.
• Strategic partnerships.
• The CBD stores are the easiest as hemp-derived CBD is legal in the United States.

In August, for example, Canada-based Village Farms International acquired Colorado-based CBD company Balanced Health Botanicals for $ 75 million.

Village Farms stated that it sees the acquisition as a "potential route" into the US THC markets once federal legalization is in place.

In contrast, marijuana deals are more complex as the plant remains illegal under federal law.

Still, one recent deal - which involved easing repayment terms for Los Angeles-based MedMen Enterprises - suggests a development in what is deemed acceptable by US securities regulators and exchanges.

The transactions are of course associated with risks.

Canadian companies looking to offer CBD in the United States are facing a saturated market, while an option to buy a U.S. marijuana company after federal legalization is highly speculative, a gamble with the dice.

"You don't know when the legalization will come, what exactly the new regulations will allow and what not, and which company will be doing well," said Mike Regan, founder of Denver-based MJResearchCo and employee of MJBizDaily and MJBizFinance.

Acquisition prices aren't as staggering as they were in April 2019, when Canadian cannabis giant Canopy Growth agreed to buy New York-based Acreage Holdings for $ 3.4 billion - provided the U.S. legalizes marijuana.

In June 2020, the deal was revised and the value dropped to $ 900 million, due to the collapse in cannabis stocks and Acreage's financial troubles.

But the prices remain relatively high in view of the unknown.

One example is Canadian company Tilray, which announced in August that it was part of a group that would acquire most of the convertible bonds from Los Angeles-based MedMen Enterprise, as well as stock warrants that can later become shares of MedMen.

At the time of the transaction, Tilray announced that it is issuing shares valued at $ 112.7 million to fund its portion of the transaction.

"This is likely to be 'dead money' for quite a while," New York-based Viridian Capital Advisors wrote recently.

Viridian went on to say that they "don't believe the US is on the cusp of legalization at the federal level," which means the deal won't make any money for Tilray anytime soon.

However, the Tilray-MedMen deal is significant in that it shows how securities regulation evolves as the U.S. nears federal legalization, Regan said.

To begin with, it was okay with the New York Stock Exchange and Nasdaq for real estate funds like Innovative Industrial Properties (NYSE), based in San Diego and AFC Gamma (Nasdaq), based in Florida, to capitalize on crop processing companies by moving their real estate and assets bought and rented it back, Regan said.

Next, lending to plants-working companies seemed fine for Nasdaq when Silver Spike Investment Corp. Received a letter from Nasdaq on July 22nd approving the company's listing for "providing loans ... in accordance with federally regulated cannabis programs regardless of their status under US federal law."

Tilray, also listed on the Nasdaq, is now buying MedMen's convertible bonds and warrants in exchange for 9 million of its Nasdaq-listed Tilray shares. While the MedMen bonds are still debt today, they can be converted into equity.

"Tilray used its Nasdaq-traded shares to purchase the convertible bonds and ease the repayment terms for MedMen," said Regan.

Otherwise, "they would enter a new foreign market against established competitors who (with legalization) will have better access to capital and liquidity," he said.

Time will tell whether this risk pays off.

Acreage and MedMen were once considered two of the brightest stars in the US cannabis industry. Today, both of them are midsize operators in multiple states, with MedMen primarily struggling to contain the losses.

In a recent interview with MJBizDaily, the CEO of Village Farms International, based in Canada, Michael DeGiglio, was critical of the strategy of some Canadian cannabis companies to purchase options on US cannabis companies that are dependent on federal legalization.

"I think this is nothing but hype and stupidity," said DeGiglio, "without knowing how (American marijuana companies) will fare in a year or two," or what the regulatory climate in the US will look like once legalization has taken place at the federal level.

He added, "What's the real benefit for me other than a press release telling the world that I will be participating in the US?"

Here's a look at three of the most recent marijuana and CBD stores:

TILRAY MEDMEN

In August, Tilray secured a 21% stake in Los Angeles-based MedMen Enterprises by purchasing convertible bonds and stock warrants.

What Tilray CEO Irwin Simon Said About The Deal: Tilray is focused on building the world's leading cannabis consumer and leading the US market as soon as legalization is possible, and MedMen is "one of the best-known brands in the 80s. Billion dollar cannabis market. "

What MedMen CEO Tom Lynch Said: The Tilray deal and a separate $ 100 million capital infusion led by Serruya Private Equity give MedMen liquidity and flexibility. "MedMen 2.0 is here and we are excited to begin the next phase of our journey."

What Viridian Capital Advisors said: "Tilray is paying an inflated price for its MedMen investment ... Several comparable competitors have growth prospects as good or better than MedMen - and better profitability - making the valuation near the top of the group difficult to reconcile Perhaps the option / security of owning a debt instead of mere stock is worth something, but not that much.

In a nutshell, MedMen: The company has cut costs and cut business areas since 2019, but is still losing a lot of money: $ 157.6 million in its fiscal year ended June 26th. The company ended the fiscal year with negative equity of $ 253.6 million.

MedMen agreed to sell a potentially lucrative New York medical cannabis license - one of only 10 in the state - for up to $ 73 million to Massachusetts-based Ascend Wellness in February.

Now, MedMen primarily relies on Serruya Infusion to maintain and grow its businesses in key markets such as Arizona, California, Florida, Illinois, and Massachusetts.

VILLAGE FARMS INTERNATIONAL-BALANCED HEALTH BOTANICALS

In August, Village Farms International acquired the Colorado-based CBD company Balanced Health Botanicals for $ 75 million.

Village Farms CEO DeGiglio said at the time: "The addition of Balanced Health's platform provides us with yet another potential avenue to enter the US high-THC cannabis market, if allowed ..."

He also referred to the company's 5.5 million square foot high-tech greenhouse facilities in West Texas, which can be converted to cannabis production as soon as allowed.

What New York investment banking firm Cantor Fitzgerald said about Village Farms: The company, which is a major producer of vegetables like tomatoes in North America, has become the lowest cost producer among Canadian cannabis growers and has a "strong following" for its flower brand Pure Sunfarms developed.

The Texan greenhouse positions Village Farms well for future Texas marijuana markets as well as interstate trade should the US legalize marijuana.

CRONOS GROUP-PHARMACANN

In June, a subsidiary of Cronos Group acquired an option to purchase 10.5% of Chicago-based multistate marijuana operator PharmaCann for $ 100.4 million.

Commenting on the deal, Cronos CEO Kurt Schmidt said, "PharmaCann was an attractive investment for us because the company has disciplined capital allocation, a strong track record and a compelling licensed manufacturing and retail presence."

What PharmaCann CEO Brett Novey said: "This investment confirms our position as a leading vertically integrated US cannabis company and underscores our ability to continue to grow and improve our strong asset base."

What Piper Sandler analyst Michael Lavery said: "As expectations of federal legalization align with legislative reality, Canadian LPs must look for ways to prepare rather than just wait for the gates to the US to open. "

Briefly about PharmaCann: The Illinois-based multi-state operator focuses on the fastest growing markets in the eastern half of the United States and has licenses in Illinois, Maryland, Massachusetts, Ohio, Pennsylvania and New York.

The company is among the 10 medical cannabis operators in New York, so it is well positioned to introduce adult cannabis sales and the introduction of smokable flowers to the medical marijuana market in that state.